Effects of the Chinese Devaluation
It has been two months since the People’s Bank of China devalued the yuan over 3% in just three days. While it is impossible to perfectly predict the long-term effects of the devaluation of the yuan, we can determine some of the potential consequences of China’s decision. Read below to see how the devaluation will affect consumers, companies and other countries.
For the American Company
There are three groups that are affected by the devaluation of the yuan, those buying goods and services from China, those selling goods and services to China, and those competing with China to sell goods and services.
The first group, those buying goods and services from China are benefited by the devaluation of the yuan. Wholesale prices will be less from mainland China,
lowering their overall costs. Whether they decide to pass that on to the consumer, however, is a different story.
The second group, those selling goods and services to China will lose revenue due to the devaluation of the yuan, at least for the short term. For example, Apple may lose expected revenue on their new iPhone 6s, but as the cheaper yuan might stimulate economic growth, it may help them in the long run.
The third group, those competing with China to sell goods and services will continue to lose money due to the devaluation of the yuan. It has become, and will continue to become, cheaper for companies to outsource to China to manufacture goods, resulting in cheaper products from those retailers. Those competing with that will be unable to keep up financially.
For the Consumer in America
Immediately, the American consumer may not see much of an effect from the devaluation of the yuan. Many holiday season orders were already negotiated before the devaluation occurred. However, in the future, as exports from China become less expensive, so might the shelf prices, assuming that companies pass on their savings to customers.
For the Chinese Company
According to Sina, exporters in China will immediately benefit from the yuan’s value depreciation. The profit margin for textile companies are 2-6% per one percent drop of the yuan. However, if companies depend on imported raw materials, it may decrease their overall profit. Another effect of the devaluation of the yuan could be that companies may begin or increase their outsourcing to China due to the less expensive rates.
For Other Countries
Just like the companies competing with Chinese companies, countries also must compete to keep their exports desirable and imports at a low cost. As Chinese exports become less expensive, many countries will turn to them as suppliers, hurting the economies of the countries they bought from before. The Vietnamese dong depreciated 1% this August, and Japan’s yen also was devalued earlier this year.